Active Capital vs. Passive Capital

When I was young I remember going to my grandparents’ house, and being fascinated by the interesting things I could find from their habit of saving, or in a better word, hoarding everything. To get from the front door to the kitchen you had to navigate through a small path that weaved through their living room. On both sides of the path, from floor to ceiling, were gadgets, trinkets, and accessories stacked one on top of the other. As years went by, they acquired more and more things.

These accumulations might have been sentimental, but because they refused to give anything up, their bedrooms had become too full and they eventually had to start stuffing their kitchen stove. This type of unnecessary accumulation is how I envision most investment vehicles today. When we think about traditional investing we naturally think of products like a qualified plan or a bank CD. However, one commonality that almost every investment has its stipulation.

Once your money is vested into an account, in order for you to get the benefit the investment provides, your money has to stay invested. For example, the moment you remove your capital from your qualified plan, whatever benefit you were receiving stops. To mitigate the consequence you then move your money into another location. Similar to all of the accumulated things at my grandparents’ house, our investments are often times stagnant and underproductive simply because our money is sitting in an investment account with no alternative use. One of the greatest downsides to this type of holding strategy is what I refer to as the “silent tax” of inflation.

Even if you are generating a consistently good rate of return in a traditional investment, your success will be diminished because of inflation. If a person invests $10,000 per year for the next 30 years in an account earning a steady 10% rate of return, that person will expect to have just over 1.8 million dollars. Assuming there are no fees or loss, the earning potential of the investment would be true. But in 30 years, at a steady inflation rate of 4%, the actual purchasing power of $1.8M will be what $500,000 dollars is worth to us today. This is nearly a 70% reduction in value!

In comes the strategy of Infinite Banking-which changes everything.  A properly structured policy gives the policyholder the ability to make his capital more productive today through controlled leverage. For instance, a policyholder can take a policy loan using the policy itself as collateral, hence generating a rate of return within the policy. The policy loan can then be utilized outside of the policy in whatever capacity the policyholder chooses. This gives the policyholder the tool to combat inflation by using his capital today without sacrificing the long term growth. The bottom line? Your capital will never be more valuable to you than it is today.

When I first began to utilize this strategy in my own life my primary purpose was to use my policy to fund other investments. Unlike having my money sitting stagnant in a traditional investment vehicle, this strategy enabled me to literally have my capital working in two places at once. As my investments turned a profit I would use the gains to repay my policy loans. Once I had repaid my policy loan, the initial capital invested was returned, and every return from that point was pure profit. Now you get the long term benefit of consistent compounding growth along with the ability to use your capital without diminishing that growth.

The exciting thing about my infinite banking strategy was the realization of the momentum in progress.  After my policy loan had been repaid, I had the capital ready to deploy the next investment. But I now had a bigger base of assets generating a profit to utilize, to then pay down my future policy loans. You see, I still had the first investment. When I repeated the process I now had two assets generating a profit, which enabled me to repay the policy loan on my next investment twice as fast. This perpetual and powerful strategy exaggerates the velocity of money in motion.

My money was no longer sitting stagnant and suffering from the silent tax of inflation, but literally working for me simultaneously in multiple locations. What’s also fantastic about infinite banking, is my money was also working inside of my policy as part of my long term financial strategy. To avoid the common mistake of stagnant money, and achieve your short and long term financial goals, reach out to Paradigm Life. Our advisors help people like you and me leave a lasting legacy to our heirs, not just a room full of stuff.

Ryan Lee

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